Greetings, welcome to the Materion Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Manager of Investor Relations. You may begin.

Good morning and thank you for joining us on our fourth quarter 2023 earnings conference call. This is Kyle Kelleher, Manager of Investor Relations. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website, that we will reference as part of today's review of the quarterly results. You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter and full year, as well as an update on key strategic initiatives. Following Jugal, Shelly will review the detailed financial results for the quarter and full year, in addition to discussing our expectations for 2024. We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income, and earnings per share reflect the adjusted GAAP numbers shown in attachments 4 through 8 in this morning's press release. The adjustments are made in the prior-year period for comparative purposes and removed special items, non-cash charges, and certain discrete income tax adjustments. And now, I'll turn over the call over to Jugal for his comments.

Thanks, Kyle, and welcome, everyone. It's great to be with you today to talk about our fourth quarter performance and our record results for full-year 2023. I'm proud of our team's focus and resilience, leading our company to another year of record sales and earnings. We overcame significant headwinds in some of our largest markets to deliver strong results, demonstrating the power of our balanced portfolio and the extraordinary potential of our unique customer partnerships. Our sharp focus on operational excellence led to continued meaningful margin expansion, structurally improving our profitability, and preparing us to maximize performance as markets recover. And while we managed our costs closely, adjusting to uncertain economic conditions, we continue to invest for the future, seeding the pipeline for long-term organic outgrowth. In the fourth quarter, the diversity of our portfolio continued to be a highlight, while several of our markets remained challenged. When excluding semiconductor, our largest market, which is experiencing significant market weakness, our sales were up slightly. Our aerospace and defense sales grew nearly 70% year-over-year, representing the 11th consecutive quarter of growth for this market. In addition to the benefits from significant organic wins in space and defense, we also saw the impact of continued increase in our content per plane. On the other hand, our semiconductor and industrial end markets continued to show significant weakness in Q4. In semi, we saw our third consecutive quarter of meaningful year-on-year declines, but the order patterns are starting to show signs of stabilization. We are also seeing some positive indicators in the broader market and expect that the related increase in demand will positively impact us starting in the second half. Our performance in the industrial space is impacted by its largest application related to non-residential and warehouse construction bills. With the impact of COVID on office space utilization, combined with higher interest rates, the demand for our beryllium nickel sprinkler material is seeing a significant inventory correction that will carry through the year. While our end market outlook remains mixed, we continue to make significant advancements on strategic initiatives that position us for long-term growth. Our organic growth projects, aligned with compelling global mega trends have allowed us to win exciting new business and ensure that we continue our strong track record of outgrowing our underlying end markets. The emerging space market continues to be a source of new opportunities for us, as illustrated by a recent fourth order to supply critical materials for space propulsion systems. These four important orders, along with several other organic wins in this market, contributed approximately $90 million in new business orders during the year. We have positioned our company as a trusted partner supplying critical materials into this exciting high-growth market. Our technical expertise continues to lead to new R&D partnerships that will drive innovation and new opportunities in several of our key end markets. In November last year, we announced that we were awarded a $5 million contract with the United States Air Force for a project to develop additive manufacturing capabilities for beryllium materials. Today, we are pleased to announce a new $4 million award from another government agency to fund additive manufacturing for other advanced materials across the aerospace, defense, and energy markets. These projects will enable us to better serve both new and existing customers who will require more complex components for next-generation applications. We are preparing for the recovery in the semi-market by expanding our capabilities. The proliferation of artificial intelligence for AI applications, specifically generative AI tools, will result in increased demand for hardware to power it. That will mean greater worldwide need for chips, which we directly support with our highly engineered semiconductor materials. Chips used to drive built-in AI capabilities in devices such as smartphones, tablets, and PCs will be in highest demand. By providing materials for both physical vapor deposition and atomic layer deposition, two important methods for the manufacture of these high-power semiconductor chips, Materion is a vital part of the supply chain enabling on-device AI functionality. We are pleased to announce that we've recently launched two new atomic layer deposition materials for advanced memory meeting the needs of our customers, who are rapidly innovating to power these future applications. In addition, our tantalum materials are used to fabricate logic chips that power AI as well as high bandwidth memory chips employed in AI processing centers. We expect the market for those chips to significantly grow over the next five years and are making investments to ensure we are ready to support that demand. Our semiconductor capabilities will also be critical to the continued evolution of the automotive industry as the shift toward electric and autonomous vehicles continues to advance. As a reminder, these vehicles require two to ten times more chips per vehicle. The transition and advanced mobility is supporting growth for our precision optics business, which is seeing an increase in demand for optical components. We are pleased to share that we've secured another customer contract to supply optical components for LIDAR technologies for autonomous vehicles. Our materials are in LIDAR modules at six vehicle OEMs currently, and we are actively providing prototypes to expand further. We have positioned ourselves as a critical technical partner in these exciting next-generation products and are looking forward to additional opportunities to serve this emerging market. We're building a strong pipeline of opportunities to support the clean energy transition with the successful development of two clean energy opportunities last year. We have also continued our work with Kairos Power and will be supplying additional material in support of their molten salt nuclear reactor program. In addition, we successfully completed the facility upgrades required to support a customer funded $15 million investment to provide critical materials for power generation. Our shipments to the customer remain ahead of schedule. Our precision clad strip facility is now fully ramped and contributing meaningfully to our performance. We remain on track with our capacity expansion, which we expect to start production at the end of this year. We have also secured a record $60 million in new defense orders in '23 as we continue to strengthen relationships with our key partners. Our materials are critical to the performance of leading-edge defense applications. The advancements I've outlined underscore the significance of our outgrowth initiatives that continue to create momentum and give us confidence as we move forward. As we share during the year, we have been focused on making targeted adjustments to improve our cost structure in order to improve the efficiency and performance of our business. This approach has been a key enabler as we expanded margins by 170 basis points last year, reaching 19.3% of sales nearing our midterm target of 20%. We'll continue to focus on operational excellence as we head into 2024 to manage through market softness and maximize our performance as markets gradually recover in the second half of the year. Our performance in '23 strengthened the confidence we have in our strategy as we delivered another record year despite volatile market conditions. I'm very proud of our team's hard work and relentless focus on delivering results and creating value for all of our stakeholders. The advances we made in '23 are paving the way for another year of record results this year. Now, let me turn the call over to Shelly to cover more details on the financials.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning starting on slide 13. In the fourth quarter, value-added sales, which exclude the impact of pass-through precious metal costs were $289.7 million, down slightly from the prior year, but up 7% sequentially. Despite strength in aerospace and defense, semiconductor and industrial remain challenged as Jugal outlined. When looking at the earnings per share, we delivered adjusted earnings of $1.41 in the fourth quarter down slightly from the prior year. Moving to slide 14, adjusted EBITDA in the quarter was $53.3 million, or 18.4% of value-added sales, down 4% from the prior year with margin expansion of 10 basis points. This year-over-year decrease is mainly due to the volume decline, but strong price mix and operational performance, including the targeted cost improvement initiatives are contributing to the increase in margins. These results also include the year-to-date adjustment to the expected manufacturer's production credit benefit, as we announced earlier this year. Moving to slide 15, let me now review fourth quarter performance by business segment. Starting with performance materials, value-added sales were $186 million, up 5% compared to the prior year, and up 10% sequentially. This record quarter and year-over-year increase was driven by strength across the aerospace and defense end markets, including meaningful contributions from space applications. EBITDA excluding special items was $46 million, or 24.7% of value-added sales, up 4% compared to $44.3 million in the fourth quarter of 2022. This growth was primarily due to higher volume, favorable price mix, and strong operational performance, despite the unfavorable year-to-date adjustment to the manufacturer's production credit. Moving to the outlook, we expect aerospace and defense to remain strong in 2024, and we'll remain on track with the expansion of our precision clad strip facility, which is expected to ramp in the latter part of 2024. Despite these growth drivers, we expect the industrial and automotive end markets to remain challenged while they face continued inventory corrections. Next, turning to electronic materials on slide 16. Value-added sales were $77.7 million, down 21% compared to the prior year, as a result of the significant weakness in the semiconductor market. EBITDA excluding special items was $11 million, or 14.2% of value-added sales in the quarter. Despite the size of a volume decline, targeted cost improvement initiatives helped to mitigate the semiconductor market's impact. As we look forward to 2024, we expect semiconductor to remain challenged through the first half of the year, with a gradual recovery starting in the second half. As we saw a delay in the market downturn's impact on material, we will experience a similar delay with the overall market upturn based on our position in the inventory chain. The first quarter of 2023 was among the strongest in the company's history for semi, with the decline beginning in Q2. And while we manage through the end of the downturn, we expect to see continued benefit from our operational excellence initiatives. Finally, turning to the precision optics segment on slide 17. Value-added sales were $26 million, down 6% compared to the prior year. This decrease was mainly driven by reduced PCR filter demand and general softening in the consumer electronics market, partially offset by strength in defense. EBITDA excluding special items was $3.8 million, or 14.7% of value-added sales. The decrease in volume was a meaningful driver of this year-over-year decline, offset by positive price mix, and the benefit of targeted cost improvement initiatives. From a sequential standpoint, we saw another quarter of EBITDA growth, along with 170 basis points of margin expansion. Looking out to 2024, we expect defense, space, and automotive to drive top line growth and expect a continued benefit from the cost improvement initiatives implemented. Moving to slide 18, let me comment on the full year. We delivered our third consecutive year of record value-added sales, adjusted EBITDA, and adjusted earnings per share. Value-added sales reached an all-time high of $1.1 billion, about 1% from the prior year. This year-over-year increase was mainly attributed to strength in aerospace and defense, and precision clad strips offset by the significant semiconductor market weakness. Adjusted EBITDA for the year was $217.7 million, or 19.3% of value-added sales, up 11% from the prior year, with margin expansion of 170 basis points. The significant margin performance was largely driven by favorable price mix, strong operational performance, including the targeted cost improvement initiatives, and the benefit from the manufacturer's production credit. We delivered $5.64 in adjusted earnings per share for the year, up 7% as compared to the prior year, despite a $0.40 interest expense headwind. 2023 did provide a favorable tax rate at 13.3%, from the impact of the non-taxable production credit, and an outsized benefit from foreign earnings. Moving out of cash, debt, and liquidity on slide 19, we ended the quarter with a net debt position of approximately $413 million, and approximately $180 million of available capacity on the company's existing credit facility. Our leverage at 1.9 times remains slightly below the midpoint of our target range. Lastly, let me transition to slide 20 and address the full-year outlook. While we expect some of our end markets to remain challenged in the near term due to macroeconomic conditions, we expect another year of record results driven by our organic pipeline and close customer partnerships. These growth drivers, along with continued operational excellence and the impact of our targeted cost initiatives will help drive earnings growth in 2024. With this, we are guiding to the range of $6.10 to $6.50 adjusted earnings per share, a 12% increase from the midpoint versus the prior year. We expect Q1 to be comparable to last year, but we'll see sequential improvement each quarter thereafter. In closing, despite some market headwinds, 2024 is shaping up to be another exciting year of market outgrowth and strong execution from Materion, leading to yet another year of record results. This concludes our prepared remarks. We will now open the line for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. And the first question today is coming from Daniel Moore from CJS Securities. Daniel, your line is live.

Thank you. Good morning, Jugal. Morning, Shelly. Thanks for taking the questions.

Hey, good morning Dan.

Good morning. Maybe start with the outlook and appreciate all the color. Just give us a sense for what level of value-added sales growth is associated with your guide for '24 and maybe just talk to the cadence a little bit, given a much tougher comp in Q1, as you described embedded within those assumptions?

Yes, Dan, as you look at our deck that we provided, we did share some of the end market growth outlooks between the various markets that we serve. We see a couple of markets on the positive favorable side, I'd say more than a 3% type of a growth, particularly aerospace, defense, and then more of the space segment of aerospace with the new business wins that we've had, I would say low single digits on several of our markets and a couple of markets that we frankly see contracting. So when we look at our overall growth for year-over-year, I would say mid single digits, it's probably reasonable for the full year. However, I would see that skewed to the back half of the year. I think the first half of the year, especially with our Q1 comps semi, as Shelly noted, was a very, very strong quarter for us last year in Q1, one of the strongest, I think, in the company's history, as the semi slowdown had not caught up to us. Whereas now, of course, we're in the full semi slowdown mode and it'll start to show the signs of recovery here in the second half of the year. So, I would expect just light growth in the first half of the year, but a much more robust growth in the back half of the year led by semi, but then also other markets as well, as well as new business activities, and so I could see a roughly a mid single digit overall for the year.

Yes. And as you heard in my comments, the first quarter is going to look a lot like first quarter last year. So when I think about the year from an earnings perspective, I'm expecting maybe a 45%, 55% weighting first half to second half.

Very helpful. It makes perfect sense. And then shifting gears a little bit longer term, I appreciate all the commentary on the semi side beyond the market growth, how should we think about the opportunity for content gains driven by higher powered logic chips, some of those which you described, Jugal in your prepared remarks looking out over the next three to five years and has that outlook changed at all?

Right. Frankly, the outlook has not changed at all for us for a longer term. Semi is our largest market. It's one that we're very, very excited about. And we continue to be very excited about where things are headed in the next three to five years. We are continuing to invest in the semi space. For example, we just mentioned that today that we're launching two new ALD materials. These are atomic layer deposition materials that are going to be used for advanced memory and AI applications. We all are hearing what's going on the AI front. And I think we're really, really well prepared for both advanced memory as well as advanced logic with our tantalum portfolio, as well as the number of other materials that we have. And in addition to that, I think when you look at overall semi investments on the capacity side, we're putting the right investments in on the capacity side for the short-term update, but also be able to capture the long-term growth. So I think on the semi side we remain excited. I would say we should probably even more so than we were earlier because of the uptake that's going to happen here in the near term, but then continued growth in the three to five years. Our portfolio is really well-positioned. Last comment, I think on the power side, as you know, power semiconductor is an important part of our portfolio. We see the applications for power semiconductor continuing to increase, whether it's EV applications or other industrial applications and our positioning with the portfolio, the product portfolio that we have, but also I would say just equally as important the customer portfolio that we have on the power semi, it's extremely, extremely strong. So we are feeling very confident I think in our ability to grow both short-term and long-term for the semi market.

Perfect. Last one I'll jump out is the guide implies we're closing in on that 20% EBITDA margin goal. Just wondering maybe if not necessarily providing an updated goal today, but talk about the operating leverage ability of the business beyond what you've already generated over the last two to three years? Thanks again.

Yes. So let me just comment a little bit first of all on '23, right? Two of the four quarters we delivered a 20% margin and I've said this a number of times that we'd like to see that on a more consistent basis. I feel that we're positioning ourselves more and more to be able to deliver that on a consistent basis, and would not be surprised if '24 represents a much more consistent basis for that 20% margin delivery. And then, clearly, that's not the end for us. As you know, we continue to challenge ourselves more and more and we will be setting up an objective that I'm sure we'll be talking to you at some point that defines what we think we can be in three to five years from now. And that's something we're looking forward to, and perhaps having that discussion during '24.

Look forward to it. Thank you again.

Thanks, Dan.

Thank you. The next question is coming from Mike Harrison from Seaport Research Partners. Mike, your line is live.

Hi, good morning.

Good morning.

Good Morning, Mike.

Jugal, I'm looking at slide seven which shows your end market performance. It's quite notable that out of the seven end markets you mentioned, five are experiencing significant declines, particularly double-digit declines. Is this reflective of the underlying market conditions, or could it be related to inventory adjustments or timing issues? Could you provide us with more details? We have a grasp of the situation in semiconductors, but I would appreciate it if you could elaborate on the industrial energy and automotive sectors, as well as what is causing the substantial declines in the fourth quarter.

Yes. It's important to highlight that the fourth quarter is a key focus. While the full year shows overall declines, the drops are significantly steeper in the fourth quarter. This reflects the underlying market conditions and de-stocking happening within these sectors. We've conducted thorough reviews with our teams to assess our share growth and new business wins, and we're confident that as the market improves, we will experience growth in 2024 and into 2025. It's clear this is tied to market de-stocking, and I can provide insights on each market. For 2024, I see a unique situation in the industrial market concerning our beryllium nickel sprinkler systems, which I believe will result in a one-time correction during the year. Beyond that, I see this predominantly as a market issue related to de-stocking, and I anticipate a turnaround in these markets throughout 2024. Notably, despite the Q4 reductions, our team has excelled in driving overall performance through pricing, improved product mix, operational efficiencies, and cost control measures. I view this as a temporary situation, with expectations for mid-single-digit growth heavily concentrated in the latter half of the year.

All right. Thanks for that. And maybe on a brighter note, the aerospace and defense market has been extremely strong here. You noted the $60 million of additional orders that you've secured. I know that that defense market in particular can have some lumpiness to it. So I'm just curious if some of the strength that you're seeing, just timing related, or are you optimistic that you're seeing a sustained pickup in opportunities and applications within that market?

Yes. Well, first of all, let's take that market and just peel it a little bit, right? And then there's three major components I would say that we should talk about. One is the commercial aerospace market. The other one is the defense market. And then the third is the very emerging space market. Let me start with that emerging space market. That's been a fantastic market for us. We indicated about $90 million of new business orders. Today we announced this fourth order of $36 million for supplying for space propulsion systems. This is the fourth order. If you kind of look at what's happened over the last year or so and look at the first three orders, add that up, that's roughly about $70 million of orders just in the space market combine that with our ToughMet business in the space market, our optical assistance business in the space market. And we're looking at roughly about $90 million. So, very good, strong market for us in '23, growing, accelerating market for us in '24, and we would hope that can continue beyond that. The aerospace market, the commercial aerospace market, we've gained content, 25% more content done on average on planes now versus pre-pandemic just in the last few years, both at the Boeing side as well as the Airbus side. So good content growth as well as you know, the build rates continue to increase, temporary situation on the Boeing side as we all are aware of, but in general, the build rates continue to increase for the airplanes. So we would expect our material content to continue to increase. And on the defense side, the team has done a fantastic job of getting our materials more and more ingrained into the defense applications. And I would expect that even though there's lumpiness, and I agree with you completely that there's lumpiness on the defense orders, we would expect a good market and good growth for defense overall for the year. So I think all three components of the aerospace and defense market we feel really good about for '24 and positioning well for '25 and beyond.

All right, very helpful. And then just a couple of quick ones, the electronic materials business in the margin or EBITDA commentary you mentioned some one-time unfavorable items hitting that business. Can you give a little more color on what those items were? And maybe how we should think about the EBITDA margin progression in 2024 in that EM business?

Yes. Thanks for that question. They did see some items, but there weren't one-time items. There was nothing that was really big that stood out, a couple of accrual adjustments, a couple of expenses that just came in at the end of the year. We do expect that from a quarter-on-quarter we will see a positive move in the margins as we enter into '24. So, we think you know, Q4 was a bit impacted just by those few one-time items and we'll see things kind of pick up in '24.

Yes. And Mike to add to that, if you look at our Q2 and Q3 results, we were on 17%, 18% EBITDA margins in the Q2, Q3 timeframe, certainly a Q4, we had the impact of the one-time items that Shelly mentioned, but also there was a significant impact based on the mix for memory devices. And you know, what's happened to the memory side, particularly in the last year. And so, that was a mix hit for us. But we would expect and we see this I think happening during the year as Shelly indicated that those one-time items are behind us and we would expect continued progression back towards the Q2, Q3 type margins and then pushing those forward after that.

All right. And then last one for me is you called out $5.6 million worth of startup costs and scrap costs for the second phase of this precision clad strip project. Is that all the startup costs or is that just a portion that you guys considered unusual? I guess I'm just looking for a little more clarity on how we should be modeling those startup costs through late 2024 if you could provide some more detail there?

Yes. Sure. Thanks for that. If you probably know, when we were working through the initial phases of the ramp of the clad strip facility, we did not special out any of those ramp costs. We took them to the P&L and we discussed and disclosed what they were. Once we were at kind of full run rate in that facility, and we had some process tweaks and some formulation tweaks that we were working on with the customer, we did incur some additional charges that we would assume are, or we would call unusual. And we didn't want that to mask the performance of the business. So we called them out and we special those charges in '22. Similarly, we're doing a little of that again, and we did that in a Q4 where we had some process runs and things that were for qualifications that needed to be scrapped. And so a lot of it is there. In addition to some resources that we've brought in just to make sure the ramp goes well. So now that we're really fully running, we don't want to have the business results skewed by up and down on the startup costs. So if we have unusual costs, we will continue to special them so that you don't have to worry about, hey, is that margin going to come down, come up during the year.

So I guess as we're thinking about the performance materials business on an adjusted basis going forward, we should assume that there's not startup costs in there, that those are going to be specialed out? Or are there still going to be some headwinds, I guess as that's ramping on an adjusted basis?

Yes. On an adjusted basis, you should assume that those will be specialed out. And you know, as we've talked about the ramp of that will start late in '24 of the sales related to that.

Right. Right, understood. Okay. Thank you very much for all the help.

Sure.

Thanks, Mike.

Thank you. The next question is coming from David Silver from CL King. David, your line is live.

Okay. Thank you. Good morning.

Good morning David.

I apologize for asking you to repeat yourself, but I wanted to discuss the softness in the electronic materials segment initially. If I'm mistaken, please correct me, but I believe last quarter Jugal mentioned that we would see an inflection point or a turnaround in the fourth quarter regarding electronic materials. It seems like the stabilization you indicated has been pushed out a bit. I understand there have been several issues affecting that group for many quarters, but is there a specific reason why your expectations for an upturn in that sector have been delayed by two or three quarters?

Yes, David. If we reflect on previous quarters, we initially believed that the semiconductor market would bottom out in Q2 and start to recover in Q3. However, feedback from major semiconductor companies has indicated that the recovery has been postponed multiple times, and the latest information suggests that Q1 will be the lowest point, with a slight recovery expected in Q2, but more significant recovery likely occurring later in the year. This situation is influenced by global usage patterns and inventory de-stocking at semiconductor companies. As a key supplier in that value chain, the recovery for us will lag slightly behind the semiconductor companies due to our position within the cycle, but we will align with the recovery as it unfolds. Our situation is closely tied to market dynamics and feedback from various semiconductor producers. A specific challenge for us has been the memory mix issue, which affected our product portfolio and led to a notable decline due to customer inventory corrections. We anticipate recovery starting in Q1 and progressing into Q2 and beyond. Overall, we are well-positioned to ramp up as semiconductor producers increase output and the recovery takes off.

Okay, very good. And I'm going to ask you to parse one comment you made near your opening remarks. But again, on electronic materials, I believe you indicated that the order book that you're seeing is kind of indicating maybe early signs of stabilization, I think was your wording. And when I think about an order book in electronic, your electronic materials business, I kind of think, well, are the orders that you're seeing, are they reflective of maybe legacy products? In which case maybe it's indicating the customer inventory liquidation is nearing an end, or alternatively, is it for more leading edge or newer applications, which kind of points to the rollout of the ramp up of new customer facilities. Is there some way you could maybe parse that the order book that you're seeing and maybe read the tea leaves there a little bit?

Yes, I believe it's a mix of both factors you mentioned. For instance, regarding the leading edge, we recently launched two new ALD materials aimed at advanced memory and AI applications. As we engage with our customers, we are beginning to sense that they might start placing orders, which we expect will translate into sales in the second and third quarters. This indicates that the new products could drive a sales increase. At the same time, we have a significant business in precious and non-precious metals associated with our legacy products. We're closely monitoring inventory levels with our customers, and based on recent observations, orders have not declined. This leads us to believe that we might be reaching a bottom and anticipate a slight increase in the order rate for those legacy products in the coming weeks. This reflects our overall outlook, expecting a modest increase in Q2 and a more significant boost in Q3 and Q4. We're also hearing similar sentiments from earnings calls and announcements from other semiconductor producers.

Okay. And then you did mention the two new ALD materials and please don't tell me anything you shouldn't tell me. But should I assume that the new materials are tantalum related the new ALD materials? Or is this kind of new-new materials, something beyond kind of use the tantalum-based activity, you know products and activities, development activities that you have ongoing?

Our ALD portfolio does not include tantalum-based materials. This portfolio was not created through our acquisition from H.C. Starck; rather, it's something we've been developing for several years. We began investing in this area when we recognized its potential. Over the past four to five years, we have developed five materials, which we categorize as advanced chemicals within the company. These materials are not related to tantalum but are more advanced materials that will be used in next-generation memory applications, including various AI applications.

Very interesting. So it sounds like Milwaukee, not Newton. So thank you for that. Okay. I just wanted to switch over maybe we don't really talk too much about your optical segment, but you've done a lot of restructuring work there. I'm just wondering if you maybe have an outlook for 2024 for that segment. I mean, is this the time when that group finally presumes organic growth? And if so, what would you say would be kind of the one or two leading sources of that turnaround?

Yes, I believe that despite the recent sales decline, the business has effectively managed its performance and control over costs through various cost management initiatives. We have experienced three consecutive quarters of EBITDA improvement. We expect to continue enhancing profitability in that business throughout 2024. In terms of revenue, during our last earnings call, we discussed orders related to space and defense in the optics sector. Now we are focusing on contracts and LIDAR technology for autonomous vehicles. These areas are likely to drive growth, with automotive and the space market contributing significantly in 2024 and continuing into 2025 and 2026. Therefore, we anticipate that this business will be a revenue contributor in 2024, as well as maintaining its positive impact on the bottom line, as seen over the past few quarters.

Okay. And then just last one for me not the biggest issue, but there was a commentary, a comment or two regarding your share repurchase authorization and whatnot. And this is just my opinion, but I don't necessarily think your typical investor is demanding that kind of activity on your part. But just remind me, I mean, is your authorization there to offset dilution? Is it for handling options related issuance? I mean, how do you anticipate your share repurchase activity fitting into your overall capital structure and cash deployment strategy?

Yes, I'll take that one. Thanks. We think a lot about capital allocation and where we want to invest our money. We do have the 8 million available on the share repurchase program that was last authorized, but we haven't had any activity on that in a couple of years. And really the reason is because we're more focused on that organic growth. So deploying our capital to our organic growth is more important to us right now than kind of offsetting dilution or bringing that share count down. And we think we're delivering really well. The returns are very good. So we've got that lever there. Should we choose to use it? But right now, it's something we're not very active on.

Makes perfect sense. Okay. Thank you very much. I'll get back in queue.

Okay. Thanks, Dave.

Thank you. The next question is coming from Samuel McKinney from KeyBanc Capital Markets. Samuel, your line is live.

Hey, good morning. It's Phil Gibbs. How are you?

Hi, Phil.

Good morning Phil.

Thanks for talking about the aerospace and defense and space market and thinking about those buckets kind of leads me into the question that I had. How much is space right now as a percentage of that total bucket? And I would think that includes satellites and commercial space?

Yes, it's becoming a much larger part of our business. As you know, Phil, you've been following our company for quite some time, and space was previously a relatively small component mainly associated with government activities or large projects like the James Webb. Now, space has grown to be a significantly larger part of our operations. Defense has also continued to expand, and commercial aerospace is on the rise as well. I would estimate that space currently accounts for about a quarter to just under a third of our overall business, and I expect to see continued growth in that area.

Thank you. And then, well, a lot of questions on margins, on electronic materials, but hoping to just simplify it a little bit. Obviously the mix wasn't ideal in the quarter. And it sounds like you're shipping under your production rates, which impacts absorption greatly when you think about that type of business. If you were shipping in line with your production rates, and if your mix was, let's just call it an average or something more ideal, where should margins have been?

Well, look, I mean, we've sat all along that that we need this business to be contributing positively to our goal of 20% EBITDA margins for the company. So I expect this business to be able to deliver those types of margins. I mean, we saw what this business was able to do in Q2 and Q3 when it had decent mix, even though we had a little bit of a sales challenge in Q2 and Q3. So I expect this business to be able to deliver favorably towards our 20% EBITDA target.

And the last one for me on the H.C. Starck acquisition from late '21 there was a little sliver in that business that was non-tantalum based. I think some of that was going to be directed toward clean energy. Any thoughts or comments that you can make along those lines? Thanks so much.

Yes. You're absolutely right and your memory is correct. I mean, we did. And I can tell you that that business is doing extremely well. Both the tantalum side by the way of non-semi application, I'll say, as well as non-tantalum business where we have pursued other markets and have grown in other markets. So, I can tell you that that business has done extremely well over the last year and a half or so with our team. And I expect a continued growth in that business over the next few years.

Thanks. Best of luck.

Thank you.

Thanks, Phil.

Thank you. The next question is coming from Dave Storms from Stonegate. Dave, your line of life.

Good morning.

Good morning, Dave.

Appreciate taking the question. Just to kind of want to start looking at the general market this year, first, last year kind of what is the general customer acquisition and contracting environment look like?

Yes, I think the acquisition and contracting environment has been good even though the markets, the actual sales in '23 were challenged in some of the markets. As we've talked about new business activity and new product development activity has continued to be strong. And as a result, we're seeing some of those things already convert into new business wins, but we would expect more of that to happen during '24. So, I think what's been positive is that customers did not really slow down new development, new R&D activity, therefore working with us, and so, we would look for those to materialize and contribute towards our one to three year sales window.

That's perfect. Great color. And just kind of sticking with those business wins, obviously as we've discussed, you're very well aligned with some really cutting edge technologies LIDAR, the AI, clean energy. Are there any of these technologies that you see as having, like particularly strong potential to take a leap and scale up over these next 18 to 36 months?

Yes, there are several factors that have contributed to our growth and I expect them to continue. For instance, in space activity, we used to be a minor player mainly focused on government projects, but now we are discussing $90 million in new business orders for space in 2023, which is an impressive level of growth. In the semiconductor market, we have several initiatives, one being ALD. As more advanced chips and AI applications are developed, we anticipate growth in ALD materials. Regarding LIDAR technology in autonomous vehicles, as we see an increase in vehicles employing LIDAR, we expect that segment of our business to grow as well. We are enthusiastic about these significant trends and believe that our portfolio aligns well with them, which we enjoy discussing during these calls and in other forums.

That's perfect. Thank you. And then just one more for me if I could. Shelly, I know you just mentioned that you're very focused on organic growth. Just curious as to how you see this in relation to any M&A activity that you think about on your horizon?

Yes, sure. So, organic has been our focus, as you know since we did our last acquisition at the end of '21, which Jugal just referred to, the main tantalum business. We are always open for business, if you will, looking at opportunities to expand our portfolio, expand our geographic footprint, but the opportunities that we have that are more near term and certain have been coming up to be organic. So we love the returns on organic projects. We're continuing to focus there, but we're not closed off to the idea of M&A should the right thing come along.

That's very helpful. Thank you both and congrats on the strong 2023.

Thank you.

Hey, thanks.

Thank you. And the next question is a follow-up coming from David Silver from CL King. David, your line is live.

Okay. Thank you for that. Just one more question and I'll stipulate this might be a little unfair, but I had a question maybe about your view of the industrial economy. So you know, it is a meaningful end market and other than electronics related to end markets, it was kind of the weakest in 2023. And then I'll just say, like over the last 24 hours I guess both Japan which might be a proxy for Asia, Japan, their economy contracted in the fourth quarter and this morning, the UK announced their economy contracted in the fourth quarter as well, so maybe a sign for continued weakness in Europe. But from your perspective, I mean, what are you hearing from your industrial customers in terms of end market demand and maybe are things still declining there or are there some signs of stabilization? And then more to the point in your fiscal year, 2024, full year guidance, what kind of improvement or what kind of change in the industrial end markets you serve is kind of built in there? Thank you.

Yes, that's a significant market for us and one we are very focused on. Looking at the general industrial market, one metric we track is PMI, which last exceeded 50 in September '22. Since then, it has remained below 50, indicating contraction. Based on our projections for the industrial market, we believe it will continue to be challenging in the '24 timeframe, hence our expectation of less than 0% growth. Additionally, we have a specific product affected by non-residential construction tied to our Beryllium nickel product, but aside from that one-time issue, we foresee ongoing challenges in the industrial sector throughout '24. The good news is our company is well diversified. While we expect the industrial market to be difficult, our other markets are showing positive trends, with the exception of automotive and industrial. This positions us to achieve a mid-single-digit year-over-year growth, driven by sectors such as semiconductors, aerospace, commercial space, and defense. We remain optimistic about our path forward despite the persistent headwinds from the industrial PMI being below 50 for an extended period. We have identified various organic growth projects, as highlighted on our slide six, and we are committed to outperforming the market in all the areas we operate in.

Okay. And I'm just going to just finish with an observation. So this was a record year for your company. I want to say Kyle, I think that a record this quarter with the most pages in the quarterly earnings slide deck. So there's a lot to go through here. Maybe send it out a little earlier. My brain doesn't work that fast in the morning, but anyway, a lot good information here, but another record, another record set, another record setting element to the quarter. All right. Thanks very much. I appreciate that.

Thanks. Well, I know that was a comment, but I'll just add to that. This is our third year in a row of records sales, record EBITDA, record margin, I mean, so a record EPS in '21, '22, and '23, our team has done just a fantastic job of delivering both on the top line and the bottom line, even during challenge times, which we experienced in '23. And I think we're extremely well-positioned to continue that into '24 and have '24 be another record year for us.

Very good. Thank you.

Thanks, David.

Thank you. And this does conclude today's question-and-answer session. I would now like to hand the call over to Kyle Kelleher for closing remarks.

Thank you. This concludes our fourth quarter 2023 earnings call. Recorded playback of this call will be available on the company's website. I would like to thank you for participating on this call and your interest in Materion. I'll be available for any follow-up questions. My number is 216-383-4931. Thank you again.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.